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spk01: Thank you all for standing by and welcome to the conference call entitled Q3 2021 Do Common Earnings Conference Call. At this time, all participants are in a listen-only mode. Near the end of today's session, we will have a question and answer session. To ask a question over the phone by that time, you may press the star key followed by the number one. Please also note that today's call is being recorded. I'll now hand the call over to your host. the Investor Relations Advisor of Decommon Incorporated, Chris Witte. Sir, you may now begin.
spk00: Thank you, and welcome to Decommon's 2021 Third Quarter Conference Call. With me today are Steve Oswald, Chairman, President, and CEO, and Chris Wampler, Vice President, Chief Financial Officer, Controller, and Treasurer. I'm going to discuss certain limitations to any forward-looking statement regarding future events, projections, or performance that we may make during the prepared remarks or the Q&A session that follows. Certain statements today that are not historical facts, including any statements as to future market conditions, results of operations, and financial projections, are forward-looking statements under the Private Securities Litigation Reform Act of 1955 and are, therefore, prospective. These forward-looking statements are subject to risks, uncertainties, and other factors which could cause actual results to differ materially from the future results expressed or implied by such forward-looking statements. Although we believe that the expectations reflected in our forward-looking statements are reasonable, we can give no assurance that such expectations will prove to have been correct. In addition, estimates of future operating results are based on the company's current business, which is subject to change. Particular risks facing to common include, among others, the cyclicality of our end-use markets, the impact of COVID-19 on our operations or customers, the terms of and our ability to complete a potential sales leaseback transaction, the level of U.S. government defense spending, timing of orders from our customers, legal and regulatory risks, management changes, the cost of expansion and acquisitions, competitions and disasters, natural or otherwise. These risks and others are described in our annual report on Form 10-K filed with the SEC and our other forward-looking statements which are subject to those risks. Statements made during this call are only as of the time made, and we do not intend to update any statements made in this presentation except if and as required by regulatory authorities. This call will also include non-GAAP financial measures. Please refer to our filings with the SEC for a reconciliation of the GAAP to non-GAAP measures referenced on today's call. We followed our 2021 third quarter Form 10-Q with the SEC today. I would now like to turn the call over to Mr. Steve Oswald for a review of the operating results. Steve?
spk02: Thank you, Chris, and thanks, everyone, for joining us today for our third quarter conference call. As usual, I will give an update on the current situation at the company, after which Chris Wample will review our financials in detail. The company remains focused, first and foremost, on the health and safety of our employees. The team has done an excellent job with the safety protocols put in place since March of 2020. We continue to follow our best practices, aligning with health authorities throughout our many operations. The total number of cases is roughly 279 since the beginning of the pandemic. and within the company who had 65 cases in Q3 of 2021. I also want to mention the company will be following the OSHA vaccination requirements, and we are currently awaiting those rules from the government. As mentioned in the press release, the Commons' third quarter results were strong. The company delivering year-over-year revenue of 9%, all organic. The company's defense business delivered another solid performance The commercial business showed year-over-year revenue growth for the first time since Q4 2019 in the quarter. The commercial aerospace markets are recovering, and we are seeing some bright spots. For example, Spirit Aerosystems was 5% of revenue for the quarter, and also going from a position of our 19th largest customer revenue in Q3 of 2020 to the 4th in Q3 of 2021. We were optimistic as well that the column will start seeing meaningful OEM bill rate increases for recent comments from Airbus and Boeing starting in 2022. In addition to revenue growth, we posted solid gross margins of 21.6%, along with adjusted EBITDA margins of 14.6%. The team also posted adjusted operating income margins of 9%, which is excellent progress As we continue to build our track record of delivering impressive financial results in any environment. The quality of earnings was high as well. The company reaching GAAP diluted EPS of 78 cents a share versus 54 cents a share for Q3 2020. A 44% increase. An adjusted diluted EPS of 83 cents a share versus 69 cents in 2020. Those numbers reflect the return to revenue growth commitment we had anticipated and communicated mid-last year. This is also a great story for our investors, as Q3 was also the second consecutive quarter of year-over-year revenue growth, with significant runway ahead. The company's third quarter revenue was higher with the commons commercial business, showing year-over-year growth the first time since Q4 2019 of 34%, and continued solid defense business versus prior year. Defense business revenues continue to show excellent progress on shipments and robust business development. The majority of gains in Q3 include the F-18, F-35, UAVs at General Atomics, which more than doubled, Raytheon tow program, and other missile programs. Our approach to the market continues to be innovative products and processes that provide significant value to the defense customer. along with striving for consistent high levels of service. The current numbers and backlog shall continue to be rewarded for this strategy. I also want to mention, as in the past, the Raytheon Missile and Defense business and the progress since signing the Strategic Supplier Agreement with them in July of 2019. We have been hard at work in three areas, new programs, offloading, and share shift. I'm happy to report that 2021 will be a record year overall with this legacy Raytheon business growing from less than $90 million in 2020 to over $115 million in 2021, an increase of more than 25% with much more runway ahead. Another highlight of this partnership occurred in Q3. As a common one, a contract with Raytheon will now be supplying critical circuit card assemblies to the SPY6 radar program with over a $15 million annual run rate. This is a major win for our defense circuit card business on a very prestigious program and a great example of our ability to help defense primes offload production and drive significant value for them with more opportunities ahead. In addition, I continue to be optimistic about defense opportunities for our company despite the overall industry challenges with examples like the SPY6 one just mentioned, GA becoming a larger customer, our newly developing Northrop relationship, and other revenue opportunities. In regards to the defense backlog, it remains strong, and ending Q3 with a backlog of $498 million. The commercial aerospace backlog also showed some signs of recovery, increasing sequentially from the second quarter for the second consecutive quarter from $276 million at the end of Q2 to $286 million at the end of Q3 2021, a very good sign. The total backlog was $836 million for the company, and it's a good number based on the environment. The company's cost actions are also continuing to pay dividends. You can certainly see, even before the pandemic, the company was working on initiatives to offset the 737 MAX. The effectiveness of our operations leadership and actions show in the solid gross profit margins and the very good operating income percentages along with the diluted EPS. I also want to mention our pricing efforts continue and are having a positive impact. In regards to the outlook, the significant backlog of defense and more momentum in commercial aerospace provide good revenue in Q4, and again in 2022. We estimate that revenue will remain strong in defense, but over the quarters ahead, we will see more and more commercial aerospace volume return to the economy. I want to make clear to our investors and our analysts, we are very well positioned with our high narrow body to wide body ratio for our business, and also as important, have the capacity, supply chain, and strong operating team to deliver in the forecasted rates ahead. We also remain active in the market for M&A, looking for new companies that fit our model, and believe this will only be an accelerator to higher results. Now let me provide some additional color on our markets, products, and programs. Beginning with our military and space sector, we posted third quarter revenue of $113.6 million, a slight increase versus 2020. The solid showing was from revenue on key defense platforms. As mentioned earlier, we saw increases in demand for F-35, F-18, UAVs, TOW, and other missile programs. The third quarter military and space revenue represented 70% of the Commons revenue in the period. We also continue to be very well positioned for further growth, as I mentioned earlier, across defense platforms over the next several quarters in all sectors, especially at Raytheon. And again, end of third quarter with a strong backlog of $498 million, which represents 60% of our total backlog. Within our commercial aerospace operations, third quarter revenue increased year-over-year to $41.2 million, driven mainly by bill grade increases on large aircraft platforms. And we're also seeing some good year-over-year growth of our business jet customers, both Gulfstream and Bombardier. Common Expects. a meaningful improvement in the market overall in 2022 and 2023, and the future, we believe, is very bright. The backlog within our commercial aerospace sector stands at roughly $286 million at the end of Q3, a slight increase sequentially compared to Q2 2021 and the second consecutive quarter of growth for the company. Before having Chris review our financial results, I want to mention that our three acquisitions since I joined the Commons, have all been winners for the company, our shareholders, and new acquisitions continue to be a very important component of our vision and strategic plan. Having said that, available capital is a critical catalyst, and therefore we've undertaken a review of our Southern California industrial legacy real estate portfolio. Industrial properties in Southern California, as in Seattle and other areas, are in extremely high demand. and the company recently initiated the marketing of one of our facilities as an expected sale-leaseback transaction. We anticipate signing and closing on this transaction in the next few months. This transaction is expected to generate in excess of at least $90 million of after-tax cash that we will then be able to deploy mainly for strategic acquisitions and debt repayment. We will also continue to evaluate additional sale leaseback opportunities as we move forward in California and are excited about the opportunity and the value we will create for the company and our shareholders. With that, I'll have Chris review our financial results in detail. Chris?
spk04: Thank you, Steve, and good afternoon, everyone. As a reminder, please see the company's 10Q and Q3 earnings release for a further description of information mentioned on today's calls. As Steve discussed, we are pleased with our third quarter results and are upbeat about the outlook for the remainder of 2021 and beyond. Execution during Q3, like much of 2021, has been a journey focusing on areas that we can control. Demonstrating strong performance and minimizing the impact of some of the things we can't control, like commercial aerospace recovery pacing, along with other pandemic-related complexities, make our Q3 performance even more noteworthy. Now turning to our third quarter results, let me review some of the highlights. Revenue for the third quarter of 2021 was $163.2 million versus $150.4 million for the third quarter of 2020. The year-over-year increase reflects $10.4 million of growth across our commercial aerospace platforms and $2.6 million of higher sales within the military and space sector. All of this growth was organic. Dukama's overall backlog at the end of the third quarter was approximately $835.5 million, the highest level since the start of the pandemic, reflecting strength in the military electronics markets as well as growth across our commercial aerospace platforms. As a reminder, we define backlog as potential revenue based on customer purchase orders and long-term agreements with firm fixed prices and expected delivery dates of 24 months or less. We posted total gross profit of $35.3 million for the quarter versus $33.5 million in the prior year period, while gross margins were 21.6% and 22.3% in 2021 and 2020, respectively. Slight decline in margin year over year reflects unfavorable product mix. SG&A was $22 million in the third quarter versus $22.1 million last year, reflecting the company's ongoing cost controls and streamlined operations. Newcomen reported operating income for the third quarter of $13.4 million, or 8.2% of revenue, compared to $10.3 million, or 6.8% of revenue, in the prior year period. Adjusted operating income, excluding restructuring expenses and costs related to the previously reported Glamis fire, was $14.1 million, or 8.6% of revenue, this quarter, compared to $12.4 million, or 8.2% of revenue, in the comparable period last year. Interest expense was $2.8 million in the third quarter of 2021 versus $3.1 million in the prior year period, reflecting lower interest rates and a lower outstanding debt balance. The company reported net income for the third quarter of $9.6 million, or $0.78 per diluted share, compared to net income of $6.5 million, or $0.54 per diluted share for the third quarter of 2020. Excluding one-time expenses, adjusted EPS for the third quarter of 2021 and 2020 was 83.69 cents, respectively. Adjusted EBITDA for the third quarter was 23.9 million, or 14.6% of revenue compared to 21.6 million, or 14.4% of revenue for the comparable period in 2020, reflecting the items I just discussed. Now let me turn to our segment results. Our electronic system segment posted revenue of $104.7 million in the third quarter of 2021 versus $103.5 million in the prior year period. These results reflect a $1.2 million increase in sales with the customers' military and space customers and a slight $0.2 million uptick in revenue across our commercial aerospace platforms. Electronic systems operating income for the third quarter was $15.3 million or 14.6% of revenue versus $14.9 million or 14.4% of revenue in the prior year period, reflecting the higher revenue and continued strong operational results at our performance centers. Our structural system segment posted revenue of $58.5 million in the third quarter of 2021 versus $46.9 million last year. The year-over-year increase reflects $10.2 million of higher sales across our commercial aerospace applications and $1.4 million of greater revenue from the company's military and space markets. The year-over-year growth helps demonstrate the underlying commercial aerospace demand recovery from the trough levels in the prior year. Structural systems operating income for the quarter was $4.5 million or 7.6% of revenue compared to $1.8 million or 3.8% of revenue last year. The year-over-year operating margin increase was due to favorable volume and fewer one-time charges. Excluding restructuring expenses and the impact of the Glamis fire, the segment operating margin was 8.8% in 2021 versus 7.7% last year. CG&A expense for the third quarter of 2021 was $6.4 million or 3.9% of revenue versus $6.4 million or 4.2% of revenue in 2020. Turning to liquidity and capital resources. We have available liquidity of 99 million and generated 5.5 million of cash from operations this quarter compared to 4.9 million in the prior year period. Q4 is typically our strongest cash flow generation quarter and we expect that to be the case this year. Our investment in inventory and level loading performance centers continues to be the most significant component of our incremental working capital investment. Our trailing debt to EBITDA ratio was 3.2 at 2.2 times at the end of the third quarter. As Steve mentioned, we are planning on an opportunistic unlocking of some of the equity we have in our Southern California real estate through a potential sale leaseback of our Gardena facility. Once completed, we expect the result is that we are in an even better position to pursue acquisitions either with the cash we expect to generate or with the additional debt capacity created from potentially paying down debt. In terms of capital expenditures, we spent $3.4 million during the quarter, reflecting lower investment requirements in the current economic environment. For the full year 2021, we anticipate spending between $16 to $18 million in capital expenditures. In conclusion, the third quarter, as expected, once again highlighted the stability and strength of DeCommon's product lines and the efficiency of our performance center, Focus Factory Operations, While military demand remains high, commercial deliveries are picking up, a trend we see continuing and we believe will gather momentum in the quarters to come. We will stay focused on employee safety, growth, solid bottom line results, and enhancing shareholder value as we assess the business for further ways to increase returns on capital. The company is in great shape as we look to deliver a strong finish to 2021 and head into 2022. I'll now turn it back over to Steve for his closing remarks.
spk02: Okay, Chris, well, thank you. And, look, just want to finish up here. We're certainly proud of the results of this quarter. It just gets us better positioned for when the commercial aerospace rates go up meaningfully, we believe, higher in 2022. We've met our commitments. We certainly have strengthened the company through this difficult period for us and for the entire industry. And that's really due to our effective strategy. our dedicated people, and our operational leadership. In closing, as in the past, I just want to thank and tell all our employees that I'm proud of them and all their efforts dealing with the many challenges of the continued issues on the pandemic and the 737 MAX. All our members show up at our operations every day, and though stressful, they get the job done for our customers, for our nations and allies, and each other. So with that, I'll turn it over for questions. Thank you.
spk01: Thank you, Mr. Oswald. Participants will now begin the question and answer session. As a reminder, to ask a question over the phone, you may press star 1 from your telephone keypads. To withdraw your request, you may press the pound key. Speakers, our first question is from Michael Charmoly of Trua Securities. Your line is now open.
spk06: Hey, good evening. This is Pete Osterlund on for Mike. Thanks for taking our question. First, just a question on what you're seeing with conditions in the labor market right now. Are you expecting any issues related to the vaccine mandates in the near term? And looking into next year, do you have the resources you need in order to ramp up to meet rising demand? Just thinking about the higher production rates you're expecting to see in commercial era?
spk02: Yeah, look, a couple things. First, just at the end of your end question, we do. We think that we're going to have the resources. I think we've been pretty careful about keeping our best people, even despite some of the challenges in commercial aerospace on the team. So I feel going into next year, we're in very good shape. So that's one thing. Second thing is that we're going to follow the OSHA requirements. and so as everybody knows, this is still in Washington being worked out, so we don't know when that's going to be effective and what that's actually going to look like, but we believe it's going to be either you're vaccinated or you get tested once a week, but that's just speculation at this point, but that's what we're going to follow. We feel good about our position, and we're looking forward to the work, to be honest with you. Great, thanks.
spk06: And then just turning to margins, at 15%, your EBITDA margins and structural systems were down a bit just compared to, I think it was 17% in the second quarter. So just wondering, what drove the step back on a sequential basis? Were there any particular platforms that impacted product mix, or are you seeing any input cost headwinds that had an impact versus prior quarter?
spk04: No, thanks for the question. I think, you know, sequentially, That's the type of, I mean, we end up with that type of movement quarter to quarter depending on how the utilization is and how the mix is. So there's no single platform that's sort of driving that. That's more just a combination, a little bit of the mix, but also, you know, the structures businesses for sure, you know, are working off of the low bases from the trough and on the build back. So there's a little more volatility as we sort of get this recovery, you know, fully going.
spk06: Great, thanks. And then just lastly, if I could, on raw materials, are you experiencing any raw material tightness on the metal side, you know, whether for titanium or any other basic materials?
spk04: I would say, you know, we're all aware, I think everybody's keenly aware of the challenges that are out there broadly. But in our particular case, you know, when we look at most of our raw materials, particularly with things like titanium, you know, and what we do through our couple of key customers with, you know, with Airbus and Boeing, there's a lot of things that we get source directed. And so we feel comfortable on the supply we've got on a lot of that. We've got other places. We've got, you know, LTAs that we've been able to sort of leverage and try to get ahead of where we need strategic components. So, you know, we feel good about that. It's not without an issue coming up now and then, but overall, we feel like we've been in a good spot.
spk06: All right. Thanks very much for taking the questions. Okay. Thanks for joining us.
spk01: Next question is from Ken Herbert of RBC. Your line is now open.
spk05: Hi. Good afternoon. Steve and Chris. Hey, Steve, I wanted to first ask about the SPY-6 announcement you just made. When does that revenue start to ramp or when do you get to that sort of $15 million a year incremental run rate? And how would you comment about the broader environment today that you're seeing for outsourcing opportunities on the defense side in particular as the primes start to lower their outlook for top-line growth into the 2022-2023 timeframe?
spk02: Yeah, well, great question, Ken. We're certainly proud of the work we're doing on the SPY-6. I think that's really going to be a 2023 event because, obviously, you know, it's a very high-level program. It's only a couple of carts, but, you know, it's going to take us some time to get all the inspection equipment. Lots of things have to happen. So, I would say that that event is really around 2023, early 2024, but it's been awarded, so that one we're very proud of. I would say what I'm seeing, and that's one of the reasons I'm optimistic about our defense business. Our penetration is fairly still at a light level. I think what I'm hearing, what I'm seeing is that there's more competition around So margins are being pressured, and folks that were more vertically integrated in the past, you just can't do that anymore. They're more firm fixed pricing. There's other things that are going on. So we feel, for us, because of all our processes and all the different things we can do, it's just the next few years we feel really good about it. More to come.
spk05: Okay. Okay. Okay, that's great. And I just wanted to follow up on the margin question. I know you're not giving specific guidance yet, but as we think about fiscal 2022 and maybe some of the mix headwinds you had in this quarter, is there any reason as you ship, as commercial becomes a bigger piece of the mix in 2022, what are the implications of that for gross margins? And is And is that a material headwind as commercial really starts to ramp and growth on the defense side slows? Or how should we think about that?
spk04: Yeah, let me – Ken, this is Chris. Let me start, and Steve can certainly jump in anywhere. But I think, you know, I think the quarter, the sequential question, you know, in some of the mix is not necessarily, you know, a harbinger of what we've got in front of us. You know, I feel like the programs that we have, particularly ones where the rates, you know, are going to be coming back on, you know, are going to be helpful. But certainly, you know, across the board, the volume is going to be very helpful as well. So, you know, I think it's both of those are going to make our road, you know, over the course of the next several quarters, you know, a little more hopefully predictable and with some more upside to it. But no, no single, you know, thing driving that right now.
spk05: Okay. Okay. And then just finally, when you complete the sale leaseback, assuming that goes through, it looks like you'll have capacity probably close to $200 million, if not more. How does the M&A pipeline look, and how are you thinking about M&A relative to other uses of cash, say debt reduction? I mean, is there a certain point at which if you don't do an acquisition, you'll start to get more aggressive on the leverage, or how do we think about that?
spk02: Yeah, I think you're spot on there. I think, you know, look, we're right now focused on closing the transaction. We're thrilled about it, by the way, especially taking advantage of, you know, these red-hot industrial markets. So that's a big positive. You know, we're going to hopefully close the transaction. We're going to have this, you know, I think unique opportunity. We're in the game. You know, we're very active right now. As you know, our strategy is around really trying to find, you know, products that, you know, are engineered that, you know, can help us on the aftermarket and, you know, continue to drive that strategy, which we've been rewarded for. So I think that'll continue. We'll have to see how everything, you know, is opportunistic with acquisitions. So, you know, we might... down the road think a little bit about lowering leverage and doing some debt pay down. We might do that. I think that's why the remarks were kind of a little bit of both. I think that's fair at this point.
spk05: It sounds like this is just Gardena. Is there similar opportunities as we think about Monrovia or Carson or some of your other Southern California footprint that could also be in the mix down the road?
spk04: Yeah, Ken, I mean, as we sort of tried to lay that out, it's more that we're reviewing, you know, all of the owned facilities. Certainly some we own, some we lease, but the ones that are owned, you know, as a part of the evaluation. Having said that, you know, the one that's been front and center here that we, you know, decided to share progress on and sort of where we're headed is Gardena, and we're sort of focused on that. We've not done a sale-leaseback transaction here in literally ever probably, but for a very long time at a minimum. And so we're sort of focused on working through that one, and then we'll keep everybody updated on where we go from there. Yeah, I think that's fair. But, Ken, we're going to review all properties.
spk02: Yep. So.
spk05: Perfect.
spk02: All right.
spk05: Thanks, guys. Nice quarter.
spk02: Okay. Thanks, Ken. Appreciate the support, as always.
spk01: Again, participants, it's star 1 to ask a question or the pound key to withdraw your request. Next question is from Mike Crawford of B. Reilly Securities. Your line is now open.
spk03: Thank you. So nice strength in the fixed wing platforms. What about rotary wing? Is that a long-term secular decline in business in that market, or do you see a rebound in the future there?
spk02: I'll tell you what, you know, I would say a couple things. First, you know, obviously on rotary, you know, it's been a fairly, I think, meaningful change in FMS sales, right? So you have certainly Apache and other things that, you know, might see some headwind. Obviously, there's things happening with the Blackhawk as well. We overall, we're in many platforms, Mike, so we think overall we're certainly in decent shape. The other thing is the stuff that we make for these things, a lot of times it's very, it's all sole sourced. It's, you know, one of a kind. So we're really not, you know, not in probably every case, but, you know, we're a lot of sole sourced on Rotary. And so, Whatever is going to happen, we're going to get it. I feel good about Rotary. I think it will be a little flattish, but I think for the common, I think we're going to come out okay.
spk03: Okay, thanks, Steve. And then just similar to the new programs, offloading and share shifts that you're garnering at Raytheon, is there anything you can comment on the same at Airbus?
spk02: But, you know, Airbus is, look, we just won, you know, the D2P, right? So, you know, that's one thing where, you know, five years ago, they didn't even know who we were, okay? So, you know, we're kind of, you know, moving forward in that vein where now we're sort of preferred with a couple other firms. Okay, fine. Now we're moving forward. We certainly, I believe that, and this is, again, speculation, but When they really start moving and they're getting into 60 plus, okay, and they're fully committed, which I think they will be, okay, I think, you know, more shares are going to be coming our way because you can only make so much in-house as far as their titanium operations. So, you know, we'll have to see how that goes. But certainly as the bill rates go up, you know, we believe we're going to pick up more business. And with the preferred status now, I mean, that's a really big deal for the company. So I think really good things ahead for Boeing and Ducamin. I mean, for Airbus and Ducamin. Excuse me.
spk03: Okay, thank you.
spk02: Okay, thanks, Mike. Thanks, Mike.
spk01: Thank you, participants. There are no further questions on queue. I'll now turn the call back over to Steve Oswald for closing remarks.
spk02: Okay, well, thank you. Just want to... uh, sent along, you know, again, by the, on behalf of the whole team, you know, we appreciate everybody's support. We're coming to the end of 2021. It certainly has been, I think, you know, a good year for the company, despite all the challenges. And, you know, we certainly wanted commercial aerospace to come back a little bit further, but has not yet, but we, we feel very good about 2022. Uh, our team is ready for, you know, for these increases, uh, and, uh, Looking forward to, you know, continued growth overall, defense, M&A, and I'll leave it there. So, again, my thanks for your time today on the phone, and be safe and have a great evening. Thanks, everyone. Thank you.
spk01: That concludes today's conference call. Thank you all for joining. You may now disconnect.
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